02/05/2018

As of this writing, the stock market continues the slide it began last week with the largest drop since the Great Recession. Positive economic news abounds, so what gives?

Don't let the President's comments mislead you: the stock market is not the economy. To the contrary, I've argued that at times a high stock market results from a weak overall economy. The Obama Administration illustrated very well this dichotomy: The Dow was just under 8000 points when Obama took office, and when Trump took office, it was nearly 19,900. Over an 8 year period, that's a return of over 12% per year for 8 years in a row. Yet, the real economy-- the American GDP-- grew at a much lower 3.8% nominal value. And that's NOMINAL, so that reflects the typical 1.5%-2% inflation as well. Thus, real economic growth was likely only about 2% per year (on average).

Other contradictions between the real economy and the stock market are readily observed. For example, rising interest rates usually point to improving economic conditions as the economy makes its own money and creates inflationary pressure. Rising home prices, rising fuel prices, etc are evidence of rising demand, increasing spending, and a generally more optimistic view of the economy.

Yet we know that Wall St responds very negatively to a rise in interest rates. Indeed, it's likely that this negative response explains much of the recent tumble in the markets; they are afraid that the Fed will raise interest rates.

Why do they care so much about rising interest rates, even when it means the overall economy is improving?

Recall with me that all loans are denominated in nominal dollars. Inflation reduces the value of those dollars over time. So lenders charge an interest rate partially to protect against that loss of value from inflation. But what happens if the actual interest rates go far above what was used to secure a debt instrument? The lender can actually lose buying power. If I borrow money at 2% interest and inflation goes up to 4%, the lender is actually losing money through inflation.

The vast majority of Wall St profits have to do with finance, and Wall St banks are on the lending side of the transaction. So what harms them is a windfall to the borrower and vice versa.

Meanwhile, main street businesses in your locality benefit from increasing consumer confidence and the spending boom that is driving higher interest rates.

The upshot here: not only is our economy much more than just Wall St., there are times when a declining stock market can be evidence of real economic growth, just as there are times when a high stock market is driven by a stagnant economy that has nowhere else in which to place investment capital.

02/02/2018

Do not be misled: I absolutely believe the Federal government must secure the borders and reform our embarrassing immigration system.

But a border wall is a terrible idea for a few reasons:

It will cost a lot of money up front and take a long time to build

It will cost a fortune in yearly upkeep

It is insufficient to guarantee border security

For the $25 billion or so they are estimating it might cost, we could buy a LOT of border patrol officers and equipment. That will buy a lot of surveillance drones, or a network of thermal sensors. Just going by upfront cost, the border wall is a poor investment in terms of cost and capability.

Finally, infrastructure is not a one-time expense. The more infrastructure you have, the more you must maintain. This problem is magnified when you have someone actively seeking to destroy the infrastructure (as inevitably, someone will attempt to dig under and bore through the wall in many locations).

The only real value of the wall is symbolic. And is a wall like the Berlin Wall a symbol we want to have associated with the USA? The passive defense a wall provides is a poor investment and provides less capability than more active security measures like drone patrols or sensor networks, satellite surveillance, or what have you.

And while border security is important, we could make it much easier to secure the border if we:

1) made illegals absolutely ineligible for government assistance or licensing

2) insisted on education only in English for primary schools.

3) required national verification of lawful status for any and all employees

4) Made it MUCH MUCH easier for people desiring to become Americans to immigrate legally.

Some of the most patriotic Americans you will ever find are those who had to WORK and WAIT for their citizenship. They realize how precious America is and value that citizenship very highly. We want more people like that living here.

Our current system provides the exact opposite of correct inventive: it makes it easy and inconsequential to immigrate illegally, and it makes it unreasonably difficult to follow the law and do it "right." Any attempt to fix our immigration system that looks at only one half of the issue is a misguided attempt that will surely fail.

12/19/2017

Recently an online interlocutor made the point to me that a "flat" tax is regressive rather than fair because minimum living expenses are largely fixed, thus creating a "proportionally" higher tax rate on those of lower income.

In the course of countering his attempted argument, I realized that the definition of "flat" and "progressive" have been shifted one echelon over, creating a distortion of terms in favor of the preferred Marxist/Progressive position.

A truly flat tax resembles a fee. If the government spends $2B on a new aircraft carrier and there are 400 million taxpayers, then a "flat" tax-- a uniform distribution of tax burden-- would simply divide that $2B among the 400M taxpayers and we'd each get a $50 bill to pay from Uncle Sam.

The ingenuity in the verbal gymnastics is in describing the rate as "flat." But the rate is not the tax. It is the first derivative, the rate of change.

A brief physics analogy illustrates this point. If you are traveling at a "flat" rate of speed, then your position is still changing, perhaps at a rate of 55 miles per hour. Likewise, if you are accelerating at a "flat" rate of 200 miles per hour per hour, your speed is changing and you will likely crash or get a ticket if you sustain that.

The key point here is this: tax BURDEN is the tax, not the tax RATE. The obvious corollary follows immediately behind: any taxation scheme in which some pay more than others is in fact progressive.

It may be progressive with respect to income-- those who earn more pay more. It might be progressive with respect to wealth-- like a property tax-- in that those with more taxable wealth pay more tax. Regardless of the basis for the progressivity, it is still "progressive" in taxation.

A proportional tax of a fixed 15% or 20% then isn't "flat" in tax, only in rate. As a tax, it is progressive. Returning to our car example, the flat rate of speed was still producing a change in position (predictable over time).

When we add a progressive rate, then the system becomes doubly progressive, like the way a change in position is affected by a "fixed" rate of acceleration. It's like taxing your income squared or income cubed by some fixed rate. The resulting distribution follows an exponential function and is progressively progressive.

This is why a so-called "flat" income tax is progressive, not regressive.

12/11/2017

The Supreme court heard recently the oral arguments in the case of the Colorado cake baker who declined to bake a cake for a gay wedding. Reading the briefs and the summaries of oral arguments, it occurred to me that the Court is facing a very difficult decision here. But that difficulty is entirely the Court's creation because of its own precedent.

The Court has declined for a long time to invalidate certain precedents when they become unworkable, choosing instead to try and craft little rules of thumb and obscure sub-interpretations that history has shown to create the proverbial Pandora's box.

Did any of the Justices ruling in Griswold intend to create a right to abortion? I don't think so. But by discovering in the "penumbras and emanations" a right to privacy, and by construing that right a certain way, we gained essentially a constitutional right to murder, albeit under limited conditions.

Likewise, the Hobby Lobby case had the Court craft the novel idea of a "closely held" business being entitled to a right of religious conviction that exempted them from Obamacare requirements. What is "closely held"? How big can a business be before it loses the right to determine its employment policies? Naturally, the Court punted on these points. Left completely uncertain is what businesses have which rights when it comes to Obamacare mandates-- or any other federal legislation that conflicts with employer's preferred policies. What if Hobby Lobby wasn't privately held? How do you measure the sincerity of the religious beliefs of the owners? How senior must someone be to speak for the company?

Examples of such unresolved and perhaps unresolvable questions abound, drawn from many cases that all point to the same conclusion: the Court is weaving a web of impossibility for itself and for all of us as Americans.

Where the Court erred is in its construct of "public access." Civil Rights legislation introduced the idea that a business open to the general public is offering a public accommodation. This is a fallacy, though. While a business may be open to the public, the conduct of business is on the private level. In other words, private business transactions are conducted with parties drawn from the general public. But these are not "public" transactions, they are private. As such, businesses do not accommodate the public at large, they accommodate individuals drawn from the public at large. This is a subtle but profound distinction.

As such, the correct governing principle is mutual consent. Are both parties agreeable to the transaction? Any legislation that grants a "civil right" to a transaction can only give that right after first having taken away the right of free association from another party. In the case of the Colorado baker, the "right" to have a cake baked for your wedding can only come from having taken away the baker's right to consent--or not consent-- to a transaction.

Having made the baker's consent secondary to whether a belief is "sincere" or whether a cake is "speech" is all nonsense. Sincerity cannot be measured as a matter of law, and it's untenable to place that in the law.

Moreover, the Baker's right at stake is not a right of "expression" either-- whether that is religious expression or "speech." Rather, it is the right of free association, which is even more fundamental than any form of expression. Everyone accepts that there must be limits on what you may say (i.e. "fighting words" or "fire in a crowded theater") and that there may even be limits on religious exercise (i.e., you cannot sacrifice children even if you sincerely believe it is pleased in your religion).

But who accepts the idea that you may not freely choose your friends? That you may not freely choose which civic groups you will belong to or avoid? That you may not exercise sole discretion over which job offer you will accept? Or which college you will attend?

The right of free association is perhaps the most fundamental of all rights. And it has been severely undermined in the name of "rights" that the Court has created from whole cloth.

I'm not expecting the Court to have the courage to undo the absurd doctrine of public access laws. But it will be interesting to see how it attempts to square the circle.

10/20/2017

I won't bother to try and inventory the list of the things Senator Sanders (I-VT) doesn't understand; that list is too lengthy for a blog posting. But I wanted to highlight a fatal flaw in Bernie Sander's Tax-The-Rich philosophy.

What Bernie (and apparently most of his supporters) doesn't understand is that applying a super high tax rate to the top bracket doesn't actually raise more money to the government. The following chart shows the correlation of the top marginal rate for each year since WW2 and the amount of revenue the federal government took in as a percentage of GDP.

Notice that when the top marginal tax rate is in the low 30% range, the actual revenue to the government varies from below 15% of GDP to is high as 20.5% of GDP. And when you crank up the top marginal tax rate to 90%, the range of variation is about the same, with as little as the low 15% range to as high as about 20.5%.

The regression line comparing revenue to top tax rate is nearly flat. In other words, the revenue to the government seems almost entirely unresponsive to the actual top marginal tax rate.

Taxing the rich simply doesn't bring in more money to the government. Government revenue is almost entirely independent of the top marginal tax rate.

Since the pie doesn't get any bigger, does taxing the rich change how the pie is sliced? We'll examine that next.

08/30/2017

Tax reform momentarily enjoys a bit of airplay, so let's talk about what tax reform should look like.

We first establish a baseline of clarity: the tax burden consists solely of the total cost in time and money of paying it. Period. It is not the rate. It is not the presence or absence of a credit or deduction. These latter items influence the tax burden, but they do not define it. As a local ad humorously intones: "In business, time is money; but money is also money."

Therefore, the only way to cut taxes meaningfully is to either collect less money or allow that money to be paid more easily, perhaps by taking less time and effort to comply with with tax law.

There are very, very few politicians on the Right or Left that actually want the government to collect less revenue. Republicans like to pretend that "cutting taxes" is a magic elixir of economic growth, so they think they can have their cake and eat it too-- cut taxes without cutting revenue. But we've already established this is a fallacy because revenue is taxation. By definition, you can only cut the financial burden of taxation by reducing gov't revenue.

The difference between Republican and Democrat positions on taxation is one of means, not ends. Both parties always want Uncle Sam to be flush with cash, the better to buy votes with and show how incredibly generous they are with confiscated funds.

The goals of tax reform should be:

1) Making the tax burden far less progressive

2) Making the tax code far simpler and less costly to comply with.

Why less progressive? A progressively higher rate makes avoidance more lucrative at you go up. And of course, those at the top have money shelters and other resources less accessible to those lower down the income scale. Thus, when you try to tax the higher income earner at ever higher rates, you make it far more worthwhile for them to avoid those taxes even as they have the resources to do so. The result is that the real burden paid by the rich-- i.e., the total dollars collected from them-- goes DOWN, not up.

There is so much evidence to support this phenomenon that I won't bother recounting it all here. Suffice it to say, the it was noted as far back as the 1920s by Andrew Mellon when he complained that tax-free bonds where being used by the rich to avoid paying taxes when the income tax rate went up. (revenue went down). And of course, the UK eliminated its 50% top tax bracket when they found that the amount of money subject to that rate dried up sufficiently to cause a loss of revenue. And after the 'Bush tax cuts for the rich' were enacted, the tax burden of the top 1% went up and did so throughout his Presidency.

Search "Taxation" on the topic at right for more on this.

Reason number one, then for making the tax code less progressive is that it actually collects more revenue from the rich. Reason number two concerns incentives as well. Progressive taxation undermines the marginal utility of work. The harder a person works, the less valuable it becomes. It unduly harms the poor as well by keeping them poor.

The best example of this phenomenon is that the bottom end of the income ladder-- a welfare case. Let's say a person can collect welfare for $200 per week or he could work for $300 a week. The effective tax rate to our potential worker is actually 66%! Why? Because he must give up $200 to earn $300. The value of the job-- his net benefit-- is therefore just $100 a week. And this is less than his $200 a week from welfare. One can hardly blame him for staying home when he'd take a pay cut to go to work. And of course, the more lucrative welfare or unemployment benefits become, the more perverse the incentives become.

Make no mistake, this is a product of the progressivity alone. If the welfare benefit is only $50 and the work still $300, then his effective "tax" for giving up welfare is only 16.7% Without welfare, the "tax" of giving it up is zero.

Progressivity in our tax code encourages the rich to game the system (with resources more than able to the task) while punishing the poor and keeping them captive in the income bracket.

The other key tax reform needed is simplicity. Stop treating taxpayers differently based on what they bought or sold, saved or spent, did or didn't. Don't make someone pay more tax because they aren't disabled, or they don't have kids, or they rent an apartment instead of have a mortgage.

Level the playing field. Instead of picking winners and losers and to who will or wont' pay more tax, just level the field. The absurdity in our tax code comes not from the nominal rates, it comes form the myriad of deductions and credits that make the rates meaningless. Someone in the "15% bracket" can end up with an effective tax rate of -30%. In other words, they are net beneficiaries because the tax code is their welfare code as well.

Let taxes be taxes and welfare be welfare. Commingling them distorts the picture and prevents honest assessment. Which is likely the entire point. Our disastrous tax is not an accident or a mystery. It is a deliberate effort to punish few and reward many so a politician can buy votes.

07/13/2017

Few things bother me more than the absurd torturing of logic and reason required to label something "sustainable." I apologize to those educated readers who are aware of the 2nd law of Thermodynamics and already know why nothing is sustainable. But there's more to it than just an abstraction of perpetually increasing entropy. There are practical questions that the environmental movement chooses to ignore and cannot answer reasonably.

What exactly does sustainability mean? If solar output declines due to cloud cover (as often happens), then what percentage of that plant's output is sustainable? If a plant can produce 10MW in bright sun but only 800kW in thick clouds, is only 800kW sustainable? Clearly, 10MW is not sustainable through a passing cloud or at night.

If an engineer defined "sustainability" is would be something like: "an energy source is sustainable if it can be expected to last more than 20 years and will over its lifetime produce greater than 100% of the energy it takes to produce, dispose and/or recycle." Of course the 20 year mark is arbitrary. But that's the point: every definition of "sustainable" is arbitrary.

Why are fossil fuels not sustainable? Humans have been harvesting coal for hundreds of years, oil and natural gas in meaningful amounts for well over a century. All the empirical evidence suggests that the fossil fuels can be sustained indefinitely. If a over a century of sustained use of an energy source doesn't demonstrate sustainability, then what is the standard of proof? Two hundred years of use?

Why are energy sources that receive massive amounts of government subsidy considered sustainable, but not those that receiver proportionally much less or none at all? Doesn't the presence necessity of subsidy inversely reflect the true sustainability of a source? If not, why not?

Is carbon emission the only applicable standard of sustainability? If not, what other measures are germane?

These are some of the questions that easily befuddle many environmentalists. But with enough thought, the smarter ones can be brought around to a realization: sustainability is not a scientific term. It is a political and economic term. It is political because of the power and money the issue attracts.

But more than anything else, it is an economic term. Something can be sustained as long as there is an economic incentive to do so. Whale oil as a lamp fuel would have been sustainable indefinitely. It's just that eventually enough whales were killed that it made the oil very costly to procure and made substitutes like kerosene far more appealing. The level of price at which whale oil would be sustained would be far too expensive for it to be useful. So it was not sustained-- but it could have been.

Likewise, Buffalo were hunted nearly to extinction in North America. But not totally. Why not? It simple: at some point, the scarcity made the value of buffalo much higher than the utility of killing more of them.

Absurd faith in carbon-scare computer models aside, there's no reason to think that fossil fuels will become any time soon more costly to use than they are worth. To the contrary, the world is "doubling down" with more fossil fuels being than ever before. Even as the world consumes more electricity than ever, electricity is overwhelmingly produced from fossil fuel sources.

There isn't any real debate. The issue is "settled" because people have voted globally with their feet. Fossil fuels are now and will remain for the foreseeable future the dominant and preferred energy source, and over time, this dominance has grown, not waned. They are getting cheaper, not more expensive. We are producing more, not less.

Let's stop pretending and just move on with optimizing the efficiency with which we consume those wonderful fossil fuels that are greening the planet and lifting millions out of poverty.

07/12/2017

The misuse of key terms in the discussion of healthcare does much damage to the quality of the discussion. It is important that we recognize that the “healthcare” discussion is actually commingling three separate issues.

Firstly—health insurance is not health care. Insurance companies do not provide health care. Care comes from medical professionals like doctors and nurses and other aides that assist them. Care is what is consumed by a healthcare consumer.

Health insurance is a scheme of risk mitigation. The idea of insurance is to protect a consumer from financial ruin associated with a costly medical care event or series of events. At least that's how it once worked. Now, health insurance is the primary middleman in complicated scheme of regulation, welfare, and payment approvals. It is the only form of insurance commonly purchased or discussed that is 1) often linked to employment status or employer benefits, and 2) used mostly as a payment scheme rather than an insurance scheme.

Finally, there is the element of wealth transfer or welfare. This is one of the government's primary roles in our health care system. It is a substantial contributor to the mess our system is in.

The only way a functional system can be built is Health, healthcare, health insurance, and welfare and considered as distinct concepts with small overlaps if any. If we decided the insurance should mean care, wealth transfer should mean care, and so forth, then the basic roles in the system disappear and we end up with a disaster like our present system.

It's time we let providers be providers. It's time we limited insurance companies only to insurance. Welfare systems and wealth transfers must be done only at the very front or back of the system, not in between all the stages.

The issue of "healthcare" isn't nearly as complicated as we are led to believe it is. What 's missing is moral courage and political will, not knowledge or understanding. Too many people are getting too rich off our present system of dependency, and nobody in political power seems willing to confront that.